One multi-bagging FTSE 250 stock I’d buy and one I’d avoid

The market likes this morning’s news from Marshalls (LSE: MSLH) and the shares are up more than 3% as I write, at 414p.

But if you’d been holding since July 2012 you’d be sitting on a capital gain of around 431% — a cracking five-year investment outcome by most standards. Yet I reckon there’s more to come from Marshall’s and I’d buy some of the firm’s shares even now.

Cyclical and growing

The firm earns more than 90% of its operating profit from hard landscaping products, which it supplies to domestic, public sector and commercial end markets. Demand is strong and the company has enjoyed robust double-digit increases in annual earnings per share over the past five years.

Cyclicality plays a big part in operations, but the company is working hard to achieve growth too. One initiative involves investing in, switching over to, and growing the firm’s Marshalls brand. Another is the ramping up of research and development, which the directors say is delivering “an encouraging pipeline of new products.”

But to invest now is to invest on the up-leg of the current macroeconomic and trading cycle, so while I’m keen on the shares, I’d also remain vigilant for a deterioration in trading conditions down the road. Yet I can’t argue with today’s interim results. Revenue pushed up 8% during the first half of the year and earnings per share shot up 16%. The directors expressed their ongoing confidence in the outlook by slapping an extra 17% on the interim dividend, which I think is encouraging.

Potential abroad

Longer term, I think the firm’s fast-growing international business could drive decent investor returns. The division contributed 6% of revenue in these results but that’s 25% higher than a year ago. The directors are also keen to invest the firm’s strong cash inflow into acquisitions that could drive further returns but say they will not compromise on their investment criteria. Overall, I think Marshall’s immediate future looks bright.

Meanwhile, Aggreko (LSE: AGK) is another firm with a lot of cyclicality in its operations but it has performed poorly over recent years, with earnings falling since 2013. The firm is a global provider of rental power, temperature control and compressed air systems, and if you’d held the shares since September 2012, you’d be nursing a capital loss of around 64% — ouch!

Challenging trading environment

The trading environment has been tough for the firm for most of the period that Marshalls has been flying. Problems include a downturn in the oil and gas industry and a slowdown in Latin America. Sometimes, it seems, diversifying across markets and continents can deliver negative outcomes by exposing a firm to every bit of trouble wherever it occurs.

City analysts following the firm expect earnings to recover by 12% during 2018, and the valuation looks reasonable with a forward price-to-earnings ratio just over 13 for 2018 at today’s share price of 849p. There’s even a 3.3% forward dividend yield. But I’m not tempted because the firm has just demonstrated its vulnerability during a period that we might have expected it to perform well. What happens to Aggreko if world economies really tank? 

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Marshalls. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.